10-Q 1 0001.txt FOR THE QUARTER ENDED 06/30/2000 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [ X ] Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 For the quarterly period ended June 30, 2000 ------------- OR [ ] Transition Report Pursuant To Section 13 or 15(d) Of The Securities Exchange Act Of 1934 For the transition period from ____________ to _______________ Commission file number 1-7636 DYNACORE HOLDINGS CORPORATION (Debtor-in-Possession) (formerly Datapoint Corporation) (Exact name of registrant as specified in its charter) Delaware 74-1605174 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8410 Datapoint Drive San Antonio, Texas 78229-8500 (Address of principal executive office and zip code) (210) 593-7000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No___. As of June 30, 2000, 18,429,605 shares of Dynacore Holdings Corporation Common Stock were outstanding, exclusive of 2,561,612 shares held in Treasury. DYNACORE HOLDINGS CORPORATION AND SUBSIDIARIES (Debtor-in-Possession) INDEX Page Number Part I. Financial Information Item 1. Financial Statements (unaudited) Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations - Quarter and Six Months Ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flows - Quarter and Six Months Ended June 30, 2000 and 1999 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 1. Legal Proceedings 16 Item 3. Default Upon Senior Securities 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature 17 --------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS Dynacore Holdings Corporation and Subsidiaries (Debtor-in-Possession) (Unaudited)
(In thousands, except share data) ------------------------------------------------------------------------------------------------------------ June 30, 2000 Dec. 31, 1999 ------------- ------------- Assets Current assets: Cash and cash equivalents $258 $2,089 Restricted cash and cash equivalents -- 298 Accounts receivable, net of allowance for doubtful accounts of $192 and $773, respectively 44,594 29,780 Inventories -- 1,563 Prepaid expenses and other current assets 210 2,363 ---------------------------------------------------------------------------------------------------------- Total current assets 45,062 36,093 Fixed assets, net 337 5,872 Other assets, net 561 2,089 ---------------------------------------------------------------------------------------------------------- $45,960 $44,054 ========================================================================================================== Liabilities and Stockholders' Deficit Current liabilities: Liabilities not subject to compromise: Payables to banks $17 $8,288 Current maturities of long-term debt -- 4,960 Accounts payable 59 13,479 Accrued expenses 7,785 23,867 Deferred revenue 341 8,125 Income tax payable 23 1,725 Liabilities subject to compromise 61,468 -- --------------------------------------------------------------------------------------------------------- Total current liabilities 69,693 60,444 Long-term debt, exclusive of current maturities -- 50,000 Other liabilities 4,841 10,166 Stockholders' deficit: Preferred stock of $1.00 par value. Shares authorized 10,000,000; shares issued and outstanding of 641,446 and 661,967 for the period ended June 30, 2000 and December 31, 1999, respectively, (aggregate liquidation preference, including dividend in arrears, $16,517 for the period ended June 30, 2000 and $16,715 for the period ended July 31, 1999). 642 662 Common stock of $0.25 par value. Shares authorized 40,000,000; shares issued 20,991,217, including treasury shares of 2,561,612 for the period ended June 30, 2000 and 2,636,167 for the period ended December 31, 1999. 5,248 5,248 Paid in capital 212,733 212,733 Accumulated other comprehensive income 300 (436) Retained deficit (246,151) (292,817) Treasury stock, at cost (1,346) (1,946) ----------------------------------------------------------------------------------------------------------- Total stockholders' deficit (28,574) (76,556) ----------------------------------------------------------------------------------------------------------- $45,960 $44,054 ========================================================================================================== See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS Dynacore Holdings Corporation and Subsidiaries (Debtor-in-Possession) (Unaudited)
----------------------------------------------------------------------------------------------------------------------------------- (In thousands, except share data) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Quarter Ended Six Months Ended ----------------------------------------------------------------------------------------------------------------------------------- June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999 ------------- ------------- ------------- ------------- Revenue: Sales $21,028 $18,407 $37,799 $38,562 Service and other 12,217 15,199 25,126 29,643 ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 33,245 33,606 62,925 68,205 Operating costs and expenses: Cost of sales 16,268 14,222 28,817 29,947 Cost of service and other 9,636 10,439 19,502 21,099 Research and development 242 395 491 881 Selling, general and administrative 7,862 8,046 15,576 15,590 Reorganization/restructuring costs -- 175 -- 813 ----------------------------------------------------------------------------------------------------------------------------------- Total operating costs and expenses 34,008 33,277 64,386 68,330 ----------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) (763) 329 (1,461) (125) Non-operating income (expense): Interest expense (302) (1,983) (1,993) (3,642) Other, net (662) 857 210 1,981 ----------------------------------------------------------------------------------------------------------------------------------- Loss before income taxes, extraordinary credit and reorganization items (1,727) (797) (3,244) (1,786) Income tax expense (benefit) (703) 186 (1,712) 419 ----------------------------------------------------------------------------------------------------------------------------------- Loss before reorganization items and extraordinary credit (1,024) (983) (1,532) (2,205) ----------------------------------------------------------------------------------------------------------------------------------- Reorganization items: Gain on sale of European Operations 49,164 -- 49,164 -- ----------------------------------------------------------------------------------------------------------------------------------- Extraordinary credit -- debt extinguishment -- -- -- 423 Net income (loss) $48,140 $(983) $47,632 $(1,782) =================================================================================================================================== Net income (loss), adjusted for preferred stock dividends paid or accumulated plus gain on exchange and retirement of preferred stock - Net income (loss) applicable to common $48,026 $(994) $47,411 $(1,910) ============================================================================================================================ Basic Earnings (Loss) Per Common Share: Income (loss) before extraordinary credit $2.61 $(.06) $2.57 $(.14) Gain on exchange of preferred stock -- .01 .01 .01 Extraordinary credit -- -- -- .02 ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) per common share $2.61 $(.05) $2.58 $(.11) =================================================================================================================================== Diluted Earnings (Loss) Per Common Share: Income (loss) before extraordinary credit $2.14 $(.06) $2.17 $(.14) Gain on exchange of preferred stock -- .01 -- .01 Extraordinary credit -- -- -- .02 ------------------------------------------------------------------------------------------------------------------------ Net income (loss) per common share $2.14 $(.05) $2.17 $(.11) ========================================================================================================================= Average Common Shares Outstanding: Basic 18,417,383 18,318,343 18,393,662 18,286,164 Diluted 22,735,771 18,318,343 22,712,050 18,286,164 See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Dynacore Holdings Corporation and Subsidiaries (Debtor-in-Possession) (Unaudited)
(In Thousands) Six Months Ended June 30, 2000 June 30, 1999 Cash flows from operating activities: Net income (loss) $47,632 $(1,782) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 785 1,448 Provisions for accounts receivable 35 48 Gain on debt extinguishment -- (423) Deferred income taxes 116 383 Gain on sale of European Operations (49,164) -- Changes in assets and liabilities, excluding effects of sale of European Operations: (Increase) decrease in receivables (5,050) 2,622 (Increase) decrease in inventory (53) 1,311 Increase (decrease) in accounts payable and accrued expenses 14,572 (2,264) Increase (decrease) in other liabilities and deferred credits (2,308) (1,727) Other, net (1,827) (918) ----------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 4,738 (1,302) Cash flows from investing activities: Payments for fixed assets (1,513) (1,627) Other, net 153 319 ------------------------------------------------------------------------------------------------------- Net cash provided (used) from investing activities (1,360) (1,308) Cash flows from financing activities: Proceeds from borrowings 46,902 45,917 Payments on borrowings (50,450) (45,559) Restricted cash for letters of credit 298 (30) ----------------------------------------------------------------------------------------------------------- Net cash used in financing activities (3,250) 328 Cash retained by European subsidiaries (1,819) -- ---------------------------------------------------------------------------------------------------------- Effect of foreign currency translation on cash (140) (527) ----------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (1,831) (2,809) Cash and cash equivalents at beginning of period 2,089 5,960 ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $258 $3,151 ==== ====== Cash payments for: Interest $341 $3,648 Income taxes, net $258 $24 Non-cash investing activities: Receivable from sale of European Operations, net of amounts held in escrow $43,500 -- See accompanying Notes to Consolidated Financial Statements.
DYNACORE HOLDINGS CORPORATION AND SUBSIDIARIES (Debtor-in-Possession) Notes to Consolidated Financial Statements (In thousands, except per share data) (Unaudited) 1. Basis of Presentation and Sale of European Operations On June 27, 2000, Dynacore Holdings Corporation (the "Company") (formerly Datapoint Corporation), elected to change its fiscal year from a July year end to a calendar year end, effective January 1, 2000. It is recommended that these statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended July 31, 1999. The accompanying unaudited consolidated financial statements have been prepared by Dynacore Holdings Corporation in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the information furnished reflects all adjustments which are necessary for a fair statement of the results of the interim periods presented. All adjustments made in the interim statements are of a normal recurring nature. The Company has not sought to retain an independent auditor, which will require court approval, subsequent to the filing of Petition for Reorganization under Chapter 11 of the United States Bankruptcy Code, as discussed below, and therefore, this Form 10-Q has been prepared without independent auditor involvement or review. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Consistent with the determination of its Board of Directors to shift the focus of the Company towards acquiring, developing and marketing products with internet and e-commerce applications, the Company and several of its subsidiaries entered into that certain Stock Purchase Agreement, dated as of July 31, 1999 (the "Reboot Agreement"), with Reboot Systems, Inc. ("Reboot") an investor group lead by Blake Thomas, the former President of the Company, to sell the European subsidiaries of the Company which comprise substantially all of the Company's operations (the "European Operations"). Subsequent to the termination of the Reboot Agreement, as a result of the lack of performance by Reboot, the Company entered into a Letter of Intent, dated January 26, 2000, with the European based CallCentric Ltd. ("CallCentric") to sell the European Operations. Pursuant to an agreement dated as of April 19, 2000 (the "Sale Agreement"), on June 30, 2000, after receipt of approval from the Bankruptcy Court, the Company sold (the "Sale") its European Operations to Datapoint Newco I Limited ("Newco"), a United Kingdom corporation affiliated with CallCentric, for $49,500 in cash, less certain adjustments in the event that the aggregate shareholder's deficit of the European Operations exceeded $10,000. The Sale Agreement contemplated, among other things, that the Company would file for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code, which was filed on May 3, 2000 and that the sale of the European Operations to Newco would be subject to higher and better offers, if any, and the approval of the Bankruptcy Court. The Bankruptcy Court approved the sale on June 15, 2000. The accompanying unaudited financial statements include a gain of $49.2 million resulting from the sale described above. Based upon the allocation of the purchase price among the assets to be transferred in the Sale, the Company believes that it has sufficient tax basis in excess of book basis of assets sold and net operating loss carryovers to avoid income taxes on the Sale. 2. Bankruptcy On May 3, 2000, the Company filed for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code for the District of Delaware. (Case No. 00-1853(PJW)). None of the Company's European subsidiaries were part of the Chapter 11 filing. Under Chapter 11, certain debts of the Company prior to the filing are stayed while the Company continues business as Debtor-in-Possession. These liabilities are reflected in the June 30, 2000 balance sheet as liabilities subject to compromise and consist of the following: 8 7/8% Convertible subordinated debentures $54,960 Accrued interest on 8 7/8% Convertible subordinated debentures 4,503 Accounts payable, net of subsidiary debt 1,587 Priority claims 418 ---------- $61,468 Since December 1, 1999 the Company has been in default of its interest payment obligation on its Debentures. As such, interest of $4.5 million has been accrued for the period June 2, 1999 through the time of Chapter 11 filing on May 3, 2000. Interest for the period May 3, 2000 through June 30, 2000 is approximately $788 thousand and has not been accrued. On June 27, 2000, the Company announced its intention to file a Plan of Reorganization pursuant to Chapter 11 of the Bankruptcy Code in substantial conformity with an agreement in principle reached with the Official Unsecured Creditors' Committee appointed in the corporation's Chapter 11 case pending in the United States Bankruptcy Court for the District of Delaware. (Case No. 00-1853(PJW)). The agreement in principle, which is subject to among other things, filing of a Plan of Reorganization, approval by creditors and equity security holders and approval by the Bankruptcy Court, provides for the distribution of approximately $34.8 million in cash to holders of the outstanding 8 7/8% Convertible Subordinated Debentures due 2006 (the "Debentures") and other unsecured creditors from the proceeds of the sale to Newco. Such cash distribution is expected to result in holders of Debentures receiving a distribution equal to approximately 60% of the face value of the outstanding Debentures, excluding accrued interest. At the time of confirmation of the proposed Plan of Reorganization, Dynacore is expected to have remaining working capital of approximately $4 million after fees, expenses and certain escrow items required in the Sale pursuant to the Sale Agreement. The agreement in principle currently under discussion with the Official Unsecured Creditors' Committee contemplates that when the reorganized Dynacore emerges from Chapter 11: (i) Debenture holders and other unsecured creditors will receive 25% of the equity of the reorganized corporation, 3 out of 7 seats on the Board of Directors, and 40% of a trust (the "Patent Litigation Trust"), to be formed to pursue the patent litigations of Dynacore more fully described below in Item 2, (ii) holders of the preferred stock, par value $1.00 per share, will receive 23.5% of the equity of the reorganized corporation, and 3.5% of the Patent Litigation Trust, (iii) holders of the common stock, par value $.25 per share, will receive 41.5% of the equity of the reorganized corporation, (iv) current officer management will receive 10% of the equity of the reorganized corporation as part of a settlement of certain officer administrative claims that include employment contract cancellation and other contractual entitlements and (v) the remaining 56.5% interest in the Patent Litigation Trust shall be retained by the reorganized Dynacore. Under the agreement in principle with the Official Unsecured Creditors' Committee, all options to purchase shares of common stock of the Company will be cancelled. The proposed Plan of Reorganization of the corporation is expected to be filed during August 2000. Pursuant to the agreement in principle, which is expected to be memorialized in the proposed Plan of Reorganization, the beneficial interests in the Patent Litigation Trust, are expected to be transferable and tradeable. In addition, pursuant to the proposed Plan of Reorganization, Dynacore will distribute to its then shareholders 75% of the first $100 million of net proceeds, if any, received on account of its beneficial interest in the Patent Litigation Trust after adjustment for corporate tax and payment of all patent litigation expenses. The accompanying unaudited financial statements as of June 30, 2000 do not give effect of any adjustments that may result from the bankruptcy proceedings. The European Operations represented 99%, of the Company's total revenue for the quarter and six months ended June 30, 2000, and 98% and 99%, respectively, for the same periods of the prior year. Excluding the European Operations, the Company's consolidated revenue and operating loss were $188 thousand and $1.6 million respectively, and $425 thousand and $3.4 million, respectively, for the quarter and six months ended June 30, 2000. Excluding the European Operations, the Company's consolidated revenue and operating loss were $801 thousand and $1.8 million respectively, and $2.4 million and $4.2 million, respectively, for the quarter and six months ended June 30, 1999. 3. Inventories On June 30, 2000, the Company included all of its remaining inventory as part of the Sale. The inventory at December 31, 1999, consisted of : Dec. 31, 1999 Raw materials $115 Work in process 138 Finished and purchased products 1,310 ----- $1,563 4. Commitments and Contingencies From time to time, the Company is a defendant in lawsuits generally incidental to its business. The Company is not currently aware of any such suit which, if decided adversely to the Company, would result in a material liability. 5. Net Income (Loss) to Common Share Net income (loss) applicable to common share is as follows:
Quarter Ended Six Months Ended ------------- ---------------- 06/30/00 06/30/99 06/30/00 06/30/99 -------- -------- -------- -------- Income Shares EPS Income Shares EPS Income Shares EPS Income Shares EPS ------------------------------------------------ --------------------- ----------------------------------------------- Income (loss) before extraordinary credit $48,140 $(983) $47,632 $(2,205) Preferred stock dividends accumulated (160) (165) (321) (331) Gain on the exchange and retirement of preferred stock 46 154 100 203 Extraordinary credit -- -- -- 423 ----------------------------------------------------------------------------------------------------------------- Basic EPS $48,026 18,417 $2.61 $(994) 18,318 $(.05) $47,411 18,394 $2.58 $(1,910) 18,286 $(.11) ---------------------------------------------------- ---------------------------------------------------- ----------------------- Dilutives: Convertible preferred stock 160 1,284 (.17) -- -- 321 1,283 (.16) -- Convertible debentures 428 3,035 (.30) -- -- 1,643 3,035 (.25) -- --------------------------------------------------------------------------------------------------------------- Diluted EPS $48,614 22,736 $2.14 $(994) 18,318 $(.05) $49,375 22,712 $2.17 $(1,910) 18,286 $(.11) ---------------------------------------------------------------------------------------------------------------------------------
The EPS computations for the quarter and six months ended June 30, 2000 and 1999, respectively, exclude the following shares for stock options, convertible preferred stock and convertible debentures because their effect would have been antidilutive: Quarter Ended Six Months Ended ------------- ---------------- 06/30/00 06/30/99 06/30/00 06/30/99 -------- -------- -------- -------- Stock options 3,537 3,537 3,537 3,537 Convertible preferred stock -- 662 -- 662 Convertible debentures -- 3,035 -- 3,035 The above does not reflect the changes in equity ownership discussed in Note 2, which will have a dilutive effect on current equity interests. 6. Comprehensive Income In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 130, Reporting Comprehensive Income. Statement No. 130 established new rules for the reporting and display of comprehensive income and its components. Comprehensive income is net income, plus certain other items that are recorded directly to stockholders' equity. The only such items currently applicable to the Company are foreign currency translation and minimum pension liability adjustments. The Company adopted this Statement in August 1998. On this basis, these nonowner (increases) decreases to stockholders' deficit, including net income or loss, for the quarter and six months ended June 30, 2000, and 1999, totaled $48.0 million and $48.4 million, respectively and $(1.7) million and $(3.4) million, respectively. 7. Other Non-operating Income (Expense) Quarter Ended Six Months Ended (In thousands) 06/30/00 06/30/99 06/30/00 06/30/99 -------- -------- -------- -------- Interest earned $-- $572 $210 $1,066 Foreign currency gains (losses) (151) (407) 120 310 Other (511) 692 (120) 605 ----- ---- ----- === $(662) $857 $210 $1,981 ====== ==== ==== ====== 8. Operating Segments In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information." Through the time of the consummation of the Sale, Dynacore was principally engaged in the development, acquisition, marketing, servicing, and system integration of computer and communication products - both hardware and software. These products and services are for integrated computer and telecommunication network systems. The Company's Chief Operating Decision Maker (CODM) assesses performance and allocates resources based on a geographic reporting structure. Through the time of the consummation of the Sale, substantially all of the Company's operations consisted of ten European subsidiaries and to a lesser extent, domestic operations. Reportable operating segments under SFAS No. 131 include the Company's subsidiaries residing in Sweden, the United Kingdom, France, and Belgium. Each of these subsidiaries functioned as value-added resellers. Included in "Corporate and Other" are general corporate activities and related expenses and activities from other foreign subsidiaries. Assets are those that are used or generated exclusively by each operating segment. The eliminations required to determine the consolidated amounts shown below consist principally of the elimination of intercompany receivables for loans provided by the operating segments to the parent entity. The following table presents certain information regarding the Company's reportable operating segments for the quarter and six months period ended June 30, 2000 and 1999:
Quarter Ended Six Months Ended ------------- ---------------- 06/30/00 06/30/99 06/30/00 06/30/99 -------- -------- -------- -------- Revenue Sweden $10,793 $9,477 $20,204 $20,851 United Kingdom 7,473 8,858 14,075 16,497 France 2,905 4,167 6,906 8,923 Belgium 1,268 4,694 3,114 8,517 Corporate and Other 10,852 6,607 18,742 13,427 Eliminations (46) (197) (116) (10) ------------------------------------------------------------------------------------------------------ Total $33,245 $33,606 $62,925 $68,205 ===========================================================
Quarter Ended Six Months Ended -------------- ---------------- 06/30/00 06/30/99 06/30/00 06/30/99 -------- -------- -------- -------- Segment Profit (Loss) Sweden $550 $671 $1,396 $1,271 United Kingdom 785 1,338 1,240 1,858 France (397) 433 (571) 694 Belgium 170 219 25 630 Corporate and Other (1,871) (2,332) (3,551) (4,578) ------------------------------------------------------------------------------------------------------ Operating Income (Loss) (763) 329 (1,461) (125) Interest Expense (302) (1,983) (1,993) (3,642) Non-Operating Income, net (662) 857 210 1,981 ----------------------------------------------------------------------------------------------------- Loss Before Income Taxes, Extraordinary Credit and Reorganizaton items $(1,727) $(797) $(3,244) $(1,786) ============================================================
Assets: June 30, 2000 December 31, 1999 --------------------------------------------------------------------------- Sweden $-- $14,408 United Kingdom -- 22,669 France -- 10,971 Belgium -- 13,028 Corporate and Other 45,960 39,723 Eliminations -- (56,745) ------------------------------------------------------------------------ Total $45,960 $44,054 ============================= 9. Acquisitions On July 27, 1999, the Company, through its newly formed subsidiary, Corebyte Inc., conditionally acquired (the "Corebyte Acquisition") the Corebyte communication and networking software product family (the "Corebyte Products"). The acquisition was accomplished pursuant to an Asset Purchase Agreement, by and among the Company, SF Digital, LLC and John Engstrom ("Engstrom"), dated July 27, 1999. Consideration provided for the Corebyte assets comprised the following: (i) options to purchase up to one million shares of common stock of the Company at an exercise price of $1.00 per share, (ii) options to purchase an additional one million shares of common stock of the Company at an exercise price equal to 80% of the closing price per share of common stock of the Company on July 27, 2000, the first anniversary of the acquisition, provided that Mr. Engstrom is still employed by the Company on such date; (iii) up to twenty-five percent of the common stock in Corebyte, Inc.; and (iv) $75,000 in cash as reimbursement for certain research and development expenses. All such consideration is being held by the Company pending final resolution of Engstrom v. Futureshare.com, LLC, a litigation. Under the agreement in principle with the Official Unsecured Creditors' Committee, all options to purchase shares of common stock of the Company will be cancelled. On June 30, 2000, the United States District Court for the Southern District of New York dismissed, without prejudice, for lack of subject matter jurisdiction John A. Engstrom v. Futureshare.com LLC (99 Civ. 3824), the pending litigation concerning the ownership status of the intellectual property underlying the Corebyte Networks(TM) product family of software licensed on an exclusive basis to the Registrant in July 1999 from Engstrom. The Court cited the general principle under the Federal Copyright Act that works are subject to copyright by the mere act of creation, subject to the notable work for hire exception. The work for hire doctrine provides that if an employee who creates a work within the scope of his or her employment, such work is automatically owned by the employer. The Court indicated that the parties did not dispute the chronology of events in this action. The software was created in November 1997, one and one-half years before futureshare.com LLC (the "LLC") was formed. Therefore, the Court concluded that Engstrom could not have been an employee of the LLC at the time of creation of the software and there is no good faith basis for the LLC to allege that the software is within the scope of the work for hire doctrine. Accordingly, the Court found that absent a transfer of rights, Engstrom is the sole owner of the software. The Court further indicated that whether a transfer of exclusive rights in the software and/or the extent of any transfer, otherwise within Engstrom's right, has been contractually modified turns on the interpretation of the language of the operating agreement of the LLC. As to this question, the Court indicated that it is purely an issue of state law and does not implicate the Federal Copyright Act. Accordingly, the Court dismissed this action without prejudice to the right to file a state action. Corebyte Inc. is led by John Engstrom, a pioneer of online and accomplished enterprise groupware and e-mail service provider. Corebyte is an intelligent browser-based enterprise-to-enterprise networking system. With a single interface, and based upon beta testing of the system performed to date, the end-user directly accesses every application necessary to manage their enterprise from basic e-mail to advanced e-commerce. Users of Corebyte seamlessly share and exchange valuable information, selectively and securely, within their network community and across enterprises. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (For the Quarter and Six Months Ended June 30, 2000 and 1999) Overview During the quarter ended June 30, 2000, the Company completed the sale of its European Operations to Datapoint Newco I Limited ("Newco"), a United Kingdom corporation affiliated with CallCentric, for $49,500 in cash, less certain adjustments, in the event that the aggregate shareholder's deficit of the European Operations exceeded $10,000. As a result of the Sale, the Company recorded a gain of $49.2 million. The Company had an operating loss of $763 thousand and net income of $48.1 million for the quarter ended June 30, 2000 compared to operating income of $329 thousand and a net loss of $983 thousand for the same period of the prior year. For the six months ended June 30, 2000, the Company had an operating loss of $1.5 million and net income of $47.6 million compared to an operating loss of $125 thousand and a net loss of $1.8 million for the same period of the prior year. For the quarter ended June 30, 2000, revenue decreased $361 thousand compared to the same period of the prior year. The decrease was primarily due to approximately lower sales of $239 thousand in the U.S., and increased sales in the Company's European subsidiaries of $2.8 million, which were substantially offset by the impact of a stronger U.S. dollar, on average, during the quarter ended June 30, 2000, as compared to the average U.S. dollar during the same period of the prior year. For the six months ended June 30, 2000, revenue decreased $5.3 million, or 7.8% compared to the same period of the prior year. The decrease was primarily attributable to increased sales of $1.8 million in the Company's European subsidiaries offset by the negative impact of $5.6 million due to a stronger U.S. dollar, on average, during the quarter ended June 30, 2000, as compared to the average U.S. dollar during the same period of the prior year and a decrease of approximately $1.6 million in U.S. sales. The European Operations represented 99%, of the Company's total revenue for the quarter and six months ended June 30, 2000, and 98% and 99%, respectively, for the same periods of the prior year. Excluding the European Operations, the Company's consolidated revenue and operating loss were $188 thousand and $1.6 million respectively, and $425 thousand and $3.4 million, respectively, for the quarter and six months ended June 30, 2000. Excluding the European Operations, the Company's consolidated revenue and operating loss were $801 thousand and $1.8 million respectively, and $2.4 million and $4.2 million, respectively, for the quarter and six months ended June 30, 1999. Operating expenses (excluding cost of revenue and restructuring) for the quarter and six months ended June 30, 2000, were $8.1 million and $16.1 million, respectively, compared with $8.4 million and $16.5 million for the same periods of the prior year. The Company has not incurred any restructuring expenses for the quarter and six months ended June 30, 2000. For the quarter and six months ended June 30, 1999, the Company incurred restructuring expenses of $175 thousand and $813 thousand, respectively. During the quarter and six months ended June 30, 2000, the Company did not repurchase in the public market any of its 8 7/8% convertible subordinated debentures. During the quarter ended June 30, 1999, the Company did not repurchase any of its 8 7/8% convertible subordinated debentures. However, for the six months ended June 30, 1999, the Company repurchased approximately $721 thousand face value of its 8 7/8% convertible subordinated debentures. These purchases resulted in an extraordinary gain of approximately $423 thousand for the six months ended June 30, 1999. Patents and Trademarks Dynacore owns certain patents, copyrights, trademarks and trade secrets in network technologies, which it considers valuable proprietary assets. Video Conferencing Patents Dynacore, along with John Frassanito and David A. Monroe, owns United States Patent Nos. 4,710,917 and 4,847,829 related to video teleconferencing technology. Dynacore had filed infringement actions against several companies. All actions were dismissed after an adverse result at trial and on appeal. Multi-speed Networking Patents Dynacore is also the owner of United States Patent Nos. 5,008,879 and 5,077,732 related to network technology. The Company believes these patents cover most products introduced by various suppliers to the networking industry and dominates certain types of dual-speed technology on networking recently introduced by various industry leaders. Dynacore has asserted one or both of these patents in the United States District Court for the Eastern District of New York against a number of parties: (1) Datapoint Corporation* v. Standard Micro-Systems, Inc. and Intel Corporation, No. C.V.-96-1685; (2) Datapoint Corporation* v. Cisco Systems, Plaintree Systems Corp., Accton Technologies Corp., Cabletron Systems, Inc., Bay Networks, Inc., Crosscom Corp. and Assante Technologies, Inc. No. CV 96 4534; (3) Datapoint Corporation* v. Dayna Communications, Inc., Sun Microsystems, Inc., Adaptec, Inc. International Business Machines Corp., Lantronix, SVEC America Computer Corporation, and Nbase Communications, No. CV 96 6334; and (4) Datapoint Corporation* v. Standard Microsystems Corp. and Intel Corp., individually, and as representatives of the class of all manufacturers, vendors and users of Fast Ethernet-compliant, dual protocol local-area network products, No. CV-96-03819. * The Company expects to make a motion with the Court to reflect the name change to Dynacore Holdings Corporation. These actions were consolidated for discovery, and for purposes of claim construction. On January 20, 1998, a hearing commenced in the United States District Court that concluded on January 23, 1998 during which claim construction was submitted to a Special Master. The Special Master's report was issued April of 1998 adverse to Dynacore. The Company had filed two sets of objections to certain portions of this report. The objections were overruled. These objections will now have to be resolved at the Appellate Court level. The briefing is completed. Both patents have been submitted to the Patent Office for re-examination. An adverse action was rendered on one patent, which the Company is contesting, and a favorable action was rendered on the other. The appeal has been stayed pending the complete outcome of the re-examination proceedings. The above actions represent the Company's continuing efforts to license and enforce its multi-speed networking patents through negotiations and/or litigation. The Company believes that these patents provide broad coverage in multi-speed networking technology and present the opportunity for further royalty bearing licenses. While such royalty bearing licenses and enforcement of its patents may create long-term value for its shareholders, the ultimate outcome of the above litigation, appeals with respect to the litigation, and /or negotiations cannot be determined at this time. Results of Operations The Company had an operating loss of $763 thousand and net income of $48.1 million for the quarter ended June 30, 2000 compared to operating income of $329 thousand and a net loss of $983 thousand for the same period of the prior year. For the six months ended June 30, 2000, the Company had an operating loss of $1.5 million and net income of $47.6 million compared to an operating loss of $125 thousand and a net loss of $1.8 million for the same period of the prior year. The following is a summary of the Company's sources of revenue (approximately 99 percent of Dynacore's international revenue was derived from customers in Western Europe):
Quarter Ended Six Months Ended (In thousands) 06/30/00 06/30/99 06/30/00 06/30/99 -------- -------- -------- -------- Sales: U.S. $54 $537 $83 $1,869 Foreign 20,974 17,870 37,716 36,693 ------ ------ ------ ------ 21,028 18,407 37,799 38,562 Service and other: U.S. 134 263 $344 $499 Foreign 12,083 14,936 24,782 29,144 ------ ------ ------ ------ 12,217 15,199 25,126 29,643 ------ ------ ------ ------ Total revenue $33,245 $33,606 $62,925 $68,205 ======= ======= ======= =======
For the quarter ended June 30, 2000, revenue decreased $361 thousand compared to the same period of the prior year. The decrease was primarily due to approximately lower sales of $239 thousand in the U.S., and increased sales in the Company's European subsidiaries of $2.8 million, which were substantially offset by the impact of a stronger U.S. dollar, on average, during the quarter ended June 30, 2000, as compared to the average U.S. dollar during the same period of the prior year. For the six months ended June 30, 2000, revenue decreased $5.3 million, or 7.8% compared to the same period of the prior year. The decrease was primarily attributable to increased sales of $1.8 million in the Company's European subsidiaries offset by the negative impact of $5.6 million due to a stronger U.S. dollar, on average, during the quarter ended June 30, 2000, as compared to the average U.S. dollar during the same period of the prior year and a decrease of approximately $1.6 million in U.S. sales. The gross profit margin for the quarter and six months ended June 30, 2000 was 22.1% and 23.2%, respectively compared to 26.6% and 25.2%, respectively, for the same periods of the prior year. Operating expenses (excluding cost of revenue and restructuring) for the quarter and six months ended June 30, 2000, were $8.1 million and $16.1 million, respectively, compared with $8.4 million and $16.5 million for the same periods of the prior year. The Company has not incurred any restructuring expenses for the quarter and six months ended June 30, 2000. For the quarter and six months ended June 30, 1999, the Company incurred restructuring expenses of $175 thousand and $813 thousand, respectively. Non-operating expenses for the quarter ended June 30, 2000, consisted primarily of interest expense of $302 thousand and foreign currency losses of $151 thousand. For the six months ended June 30, 2000, non-operating expenses consisted primarily of interest expense of $2.0 million and foreign currency gains of $120 thousand. For the quarter and six months ended June 30, 2000, as a result of the Sale, the Company recorded a gain of $49.2 million. Non-operating income and expenses for the quarter ended June 30, 1999 consisted primarily of interest expense $2.0 million and foreign currency losses of $407 thousand. For the six months ended June 30, 1999, non-operating income and expenses consisted primarily of interest expense of $3.6 million and foreign currency gains of $310 thousand and interest income of $1.1 million. During the quarter and six months ended June 30, 2000, the Company did not repurchase in the public market any of its 8 7/8% convertible subordinated debentures. During the quarter ended June 30, 1999, the Company did not repurchase any of its 8 7/8% convertible subordinated debentures. However, for the six months ended June 30, 1999, the Company repurchased approximately $721 thousand face value of its 8 7/8% convertible subordinated debentures. These purchases resulted in an extraordinary gain of approximately $423 thousand for the six months ended June 30, 1999. Financial Condition Consistent with the determination of its Board of Directors to shift the focus of the Company towards acquiring, developing and marketing products with internet and e-commerce applications, the Company and several of its subsidiaries entered into that certain Stock Purchase Agreement, dated as of July 31, 1999 (the "Reboot Agreement"), with Reboot Systems, Inc. ("Reboot") an investor group lead by Blake Thomas, the former President of the Company, to sell the European subsidiaries of the Company which comprise substantially all of the Company's operations (the "European Operations"). Subsequent to the termination of the Reboot Agreement, as a result of the lack of performance by Reboot, the Company entered into a Letter of Intent, dated January 26, 2000, with the European based CallCentric Ltd. ("CallCentric") to sell the European Operations. Pursuant to an agreement dated as of April 19, 2000 (the "Sale Agreement"), on June 30, 2000, after receipt of approval from the Bankruptcy Court, the Company sold (the "Sale") its European Operations to Datapoint Newco I Limited ("Newco"), a United Kingdom corporation affiliated with CallCentric, for $49,500 in cash, less certain adjustments in the event that the aggregate shareholder's deficit of the European Operations exceeded $10,000. The Sale Agreement contemplated, among other things, that the Company would file for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code, which was filed on May 3, 2000 and that the sale of the European Operations to Newco would be subject to higher and better offers, if any, and the approval of the Bankruptcy Court. The Bankruptcy Court approved the sale on June 15, 2000. The Company recorded a gain of $49.2 million as a result of the Sale. Based upon the allocation of the purchase price among the assets to be transferred in the Sale, the Company believes that it has sufficient tax basis in excess of book basis of assets sold and net operating loss carryovers to avoid income taxes on the Sale. On May 3, 2000, the Company filed for reorganization pursuant to Chapter 11 of the United States Bankruptcy Code for the District of Delaware. (Case No. 00-1853(PJW)). None of the Company's European subsidiaries were part of the Chapter 11 filing. Under Chapter 11, certain debts of the Company prior to the filing are stayed while the Company continues business as Debtor-in-Possession. These liabilities are reflected in the June 30, 2000 balance sheet as liabilities subject to compromise and consist of the following: 8 7/8% Convertible subordinated debentures $54,960 Accrued interest on 8 7/8% Convertible subordinated debentures 4,503 Accounts payable, net of subsidiary debt 1,587 Priority claims 418 ---------- $61,468 Since December 1, 1999 the Company has been in default of its interest payment obligation on its Debentures. As such, interest of $4.5 million has been accrued for the period June 2, 1999 through the time of Chapter 11 filing on May 3, 2000. Interest for the period May 3, 2000 through June 30, 2000 is approximately $788 thousand and has not been accrued. On June 27, 2000, the Company announced its intention to file a Plan of Reorganization pursuant to Chapter 11 of the Bankruptcy Code in substantial conformity with an agreement in principle reached with the Official Unsecured Creditors' Committee appointed in the corporation's Chapter 11 case pending in the United States Bankruptcy Court for the District of Delaware. (Case No. 00-1853(PJW)). The agreement in principle, which is subject to among other things, filing of a Plan of Reorganization, approval by creditors and equity security holders and approval by the Bankruptcy Court, provides for the distribution of approximately $34.8 million in cash to holders of the outstanding 8 7/8% Convertible Subordinated Debentures due 2006 (the "Debentures") and other unsecured creditors from the proceeds of the sale to Newco. Such cash distribution is expected to result in holders of Debentures receiving a distribution equal to approximately 60% of the face value of the outstanding Debentures, excluding accrued interest. At the time of confirmation of the proposed Plan of Reorganization, Dynacore is expected to have remaining working capital of approximately $4 million after fees, expenses and certain escrow items required in the Sale pursuant to the Sale Agreement. The agreement in principle currently under discussion with the Official Unsecured Creditors' Committee contemplates that when the reorganized Dynacore emerges from Chapter 11: (i) Debenture holders and other unsecured creditors will receive 25% of the equity of the reorganized corporation, 3 out of 7 seats on the Board of Directors, and 40% of a trust (the "Patent Litigation Trust"), to be formed to pursue the patent litigations of Dynacore more fully described below in Item 2, (ii) holders of the preferred stock, par value $1.00 per share, will receive 23.5% of the equity of the reorganized corporation, and 3.5% of the Patent Litigation Trust, (iii) holders of the common stock, par value $.25 per share, will receive 41.5% of the equity of the reorganized corporation, (iv) current officer management will receive 10% of the equity of the reorganized corporation as part of a settlement of certain officer administrative claims that include employment contract cancellation and other contractual entitlements and (v) the remaining 56.5% interest in the Patent Litigation Trust shall be retained by the reorganized Dynacore. Under the agreement in principle with the Official Unsecured Creditors' Committee, all options to purchase shares of common stock of the Company will be cancelled. The proposed Plan of Reorganization of the corporation is expected to be filed during August 2000. Pursuant to the agreement in principle, which is expected to be memorialized in the proposed Plan of Reorganization, the beneficial interests in the Patent Litigation Trust, are expected to be transferable and tradeable. In addition, pursuant to the proposed Plan of Reorganization, Dynacore will distribute to its then shareholders 75% of the first $100 million of net proceeds, if any, received on account of its beneficial interest in the Patent Litigation Trust after adjustment for corporate tax and payment of all patent litigation expenses. During the six months ended June 30, 2000, the Company's cash and cash equivalents decreased $1.8 million. During the six months ended June 30, 2000, the Company's net cash used in investing activities was approximately $1.4 million which included fixed asset purchases (primarily test equipment, spares, and internally-used equipment). Net cash provided by financing activities was $3.3 million during the six months ended June 30, 2000, which primarily included borrowings of $46.9 million offset by payments of $50.5 million. As of June 30, 2000, the Company did not have any restricted cash as compared to $328 thousand for the five months ended December 31, 1999. The balances were restricted primarily to cover various lines of credits, reflected as payables to banks. Reorganization/Restructuring Costs (In thousands) During the quarter and six months ended June 30, 2000, the Company did not incur any restructuring costs for employee termination costs. During the quarter and six months months ended June 30, 1999, the Company incurred restructuring costs of $175 and $813, respectively. These costs related to the downsizing at the Company's San Antonio headquarters. At June 30, 2000, accrued but unpaid restructuring costs were approximately $69. Such costs are expected to be paid through the third quarter of calendar year 2000. Restructuring charges are not recorded until specific employees are determined (and notified of termination) by management in accordance with its overall restructuring plan. Employee termination payments are generally paid out over a period of time rather than as one lump sum. Year 2000 Compliance The Year 2000 Issue was the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that had date-sensitive software or embedded chips may have recognized a date using "00" as the year 1900 rather than the year 2000. This could have resulted in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, generate invoices, or engage in similar normal business activities. Based on the Company's assessments, the Company modified and/or replaced significant portions of hardware and software so that those systems would properly utilize dates beyond December 31, 1999. The Company also assessed and modified and/or replaced its non Information Technology ("IT") operating systems to insure compliance with Year 2000 which included those primarily related to the office and facilities' environment (telephone systems, security systems, etc.). As a result of its efforts, Dynacore was prepared for the transition to the Year 2000 and did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Dynacore is not currently aware of any year 2000 problems that have materially affected its customers or suppliers. Based on operations since January 1, 2000, the Company does not anticipate any material disruption in its operations as a result of any continuing Year 2000 issues. However it is possible that latent problems may arise in the future. The Company believes that any such problems are likely to be minor and correctable. Dynacore's aggregate costs for its Year 2000 actions were approximately $1.2 million. New European Currency In January 1999, certain European countries introduced a new currency unit called the "euro". In conjunction with the preparation for the year 2000, the Company also modified and/or adapted systems designed to properly handle the euro. The costs required to be able to accommodate the euro were combined with costs of becoming year 2000 compliant, and therefore not easily identifiable. However, they are not considered to be so significant so as to have a material effect on the Company's business. Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results This Quarterly Report on Form 10-Q contains forward-looking statements about the business, financial condition and prospects of the Company. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including, without limitation, the ability of the Company to consummate the sale of its European Operations, actions which may be taken by trade creditors of the Company or holders of the Company's Debentures, changes in product demand, the availability of products, changes in competition, economic conditions, new product development, various inventory risks due to changes in market conditions, changes in tax and other governmental rules and regulations applicable to the Company, and other risks indicated in the Company's filings with the Securities and Exchange Commission. These risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words "believes," "estimates," "plans," "expects," and "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information concerning market risk is contained on page 18 of the Registrant's Annual Report on Form 10-K for the year ended July 31, 1999 and is incorporated by reference to such annual report. PART II. OTHER INFORMATION Item 1. Legal Proceedings On May 3, 2000 the Company filed a petition pursuant to Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The case has been assigned docket number 00-1853 (PJW). See Item 3 of Registrant's Report on Form 10-K for the fiscal year ended July 31, 1999, for a description of certain legal proceedings heretofore reported. The Company is a Plaintiff in a number of actions related to its patents and trademarks which are more fully described in the Management's Discussion and Analysis overview section of this Form 10Q. On February 17, 2000, Blake Thomas, the former President of the Company, who was terminated effective December 30, 1999, filed an action for $119 thousand of severance and vacation pay with the Texas Work Force Commission at the Texas Workman's Compensation Court. Blake Thomas has also filed a general unsecured claim for $1,878,637.00 with the United States Bankruptcy Court. The Company expects to contest these claims. Final disposition of this matter will be determined by the United States Bankruptcy Court. Item 3. Defaults Upon Senior Securities Since December 1, 1999 the Company has been in default of its interest payment obligation on its Debentures which were issued pursuant to the Indenture (See Part I, note 1 to Financial Statements). The Company has had informal meetings with certain of the large holders of Debentures concerning such default. As of June 30, 2000, the default and the total arrearages in interest total approximately $4.5 million. In addition, as of June 30, 2000, the Company has outstanding 641,446 shares of its preferred stock, par value $1.00 per share. The aggregate liquidation preference and dividend arrearages on such shares is approximately $16.5 million including dividend arrearages of $3.7 million. Item 6. Exhibits and Reports on Form 8-K Reports on Form 8-K: In a report filed on Form 8-K dated May 3, 2000, the Company reported that it had filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware and that it had entered into the Stock Purchase Agreement. In a report filed on Form 8-K dated June 15, 2000, the Company reported that on June 15, 2000, the United States Bankruptcy Court for the District of Delaware approved the sale of its European Operations and certain U.S. assets to Datapoint NewCo 1 Limited and the approval of the Company's name change to Dynacore Holdings Corporation. In a report filed on Form 8-K dated June 30, 2000, the Company reported that the sale of its European Operations and certain U.S. assets to Datapoint NewCo 1 Limited had been completed. In a report filed on Form 8-K dated June 27, 2000, the Company reported that an agreement had been reached in principle with the Official Unsecured Creditors' Committee appointed in the Company's Chapter 11 case pending in the United States Bankruptcy Court for the District of Delaware and that the Company had changed its fiscal year end to December 31. In a report filed on Form 8-K dated June 30, 2000, the Company reported that on June 30, 2000, the United States District Court for the Southern District of New York dismissed, without prejudice, for lack of subject matter jurisdiction John A. Engstrom v. Futureshare.com LLC (99 Civ. 3824). SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DYNACORE HOLDINGS CORPORATION (Debtor-in-Possession) (Registrant) DATE: August 21, 2000 /s/ Phillip P. Krumb Phillip P. Krumb Acting Chief Financial Officer (Acting Chief Accounting Officer)